Financial institutions such as banks and credit card companies need to exchange information about their customers' accounts.
By way of example, if a customer walks into a bank to deposit money, or walks up to an automatic teller machine (ATM) to withdraw money, the bank can check its own customer files to authorize the transaction. The transaction never leaves the bank. However, if that same 1 customer walks up to an ATM owned by a second bank, the second bank's computer determines that this is not one of its own cards. The second bank has to check with the first bank to ensure that the funds are available.
The banks do not communicate directly with each other. Instead, they both communicate with a central organization that acts as a clearing house providing an electronic data interchange. Examples of such central clearing houses are Star, Mac, Plus, and Explore. These organizations provide services to their member institutions. Their main technical role is to operate a computer, called a "switch", that manages the exchange of these transactions. The first six digits of an ATM card are the bank identification number. The ATM card number is provided to a switch which in turn identifies the destination bank and routes the accompanying transaction. ATMs display the logos of the central clearing house systems which they recognize. Credit and debit cards in people's wallets display these same names.
Central clearing house switches also provides a settlement function. Once a day the central clearing house switch stores all transactions for the previous 24 hours in a file, and sends reports to its member banks electronically. For example, if a cardholder of a first bank withdrew $100 from an ATM of a second bank, the clearing house switch goes through a settlement process to reconcile the two accounts, debiting the first bank and crediting the second bank.
Central clearing house switches offers banks an electronic interchange of data while imposing strict regulations and security. It allows a local bank to establish a regional, a national, and even an international presence. Through central clearing house switches many banks are connected and a network of switches allows a customer to walk up to an ATM in a foreign country, insert their card, and receive local currency.
Banks communicate with central clearing house switches following the standards and procedures set by the organization that runs each switch. Each organization publishes a set of interface specifications describing how to connect, what the format of the message must be, what security requirements are required, and what federal and state regulations to follow.
Banks obtain a copy of these specifications and use it to build a computer interface between their computer system and the switch. Their interface must comply with these specifications before they are allowed to connect to the switch.
The organizations that run the switches provide consulting expertise, for a fee, to assist banks in the development of their interface. After development comes testing, then usually more development, more testing, and finally certification. To pass certification, the bank's interface must satisfactorily accomplish a certain set of transactions and withstand certain types of failures.
The flow and the content of the messages must be strictly adhered to and so the bank's new software interface must be rigorously tested. However, test time on the switch is difficult to schedule, is only available in small time blocks, and is not always available at convenient times.